Aserial entrepreneur I once met offered a simple, yet powerful, two-step formula for turning around a struggling business: Cut your expenses to break even and then grow your sales. Inspired by this advice and in memory of this great Pittsburgh entrepreneur, I want to share and expand on a three-step approach I’ve found invaluable for small businesses looking to turn things around: Assess, Break Even, Cash Flow.
Step 1: Assess Your Current Situation
Before making any changes, a thorough assessment of the current business landscape is essential. This is your moment to take a deep dive into your company’s financial health, market position and internal operations. Without this crucial step, you risk treating the symptoms instead of addressing the root causes of your struggles.
* Analyze Financials: Where are your losses coming from? Use financial ratios like gross margin, net profit margin and operating expenses as a percentage of revenue to identify inefficiencies.
* Evaluate Operations: By streamlining processes and rethinking workflows, businesses can often find hidden savings.
* Customer and Market Analysis: Is the market still interested in your products or services? Talk to customers, gather feedback and identify areas where you might need to pivot or adjust.
Step 2: Break Even as Quickly as Possible
Once you’ve assessed the situation, the next step is to focus on breaking even. The goal is simple: Reduce expenses to match (or come under) your current revenue levels.
* Cut Nonessential Costs: Start by cutting discretionary spending. This could include areas like noncritical software, travel, or luxury office spaces.
* Negotiate with Suppliers and Creditors: Don’t hesitate to negotiate with suppliers for discounts or extended payment terms. Similarly, working with creditors to restructure debt could reduce immediate financial strain.
* Review Staffing Costs: Evaluate whether staffing levels are in line with current revenue. If layoffs are necessary, consider temporary furloughs or reduced hours to retain valuable employees.
Step 3: Focus on Cash Flow Management
After you’ve broken even, cash flow becomes your most critical metric. This phase is where many businesses falter, but with careful planning and discipline, it’s possible to turn things around.
* Sell, Sell, Sell: Increasing sales is one of the most direct ways to generate more cash. Focus on improving both your top line and bottom line by driving revenue.
* Accelerate Receivables: Consider offering discounts for early payments or switching to faster payment platforms. Also reconsider credit terms with customers, especially those with a history of late payments.
* Manage Payables Strategically: While you want to accelerate incoming cash, consider extending your outgoing payments, giving you more time to pay your bills without incurring late fees.
* Build a Cash Reserve: Having three to six months of operating expenses saved can give you peace of mind during downturns or unexpected crises.
Conclusion: Grow your way out
By following these steps, you’ll be prepared to not just survive, but thrive. It’s not easy, and there will be tough decisions along the way, but with a focused approach, many small businesses can find their way back to profitability and growth.
Dr. Eric Swift is a management consultant at the Institute of Entrepreneur Excellence, University of Pittsburgh
